Warsh Opens Door to Rate Hike in Inflation Fight

Federal Reserve Chairman Kevin Warsh told Congress on Tuesday that June's slowdown in inflation does not mean the central bank's work is finished. For the first time since taking office in May, he pointed to the tools the Fed could use if price pressures persist.

During three hours of testimony, lawmakers pressed Warsh on how he plans to deliver on his promise to restore price stability. The Fed has missed its 2% inflation target for years. Warsh stopped short of signaling a rate increase. He made clear that interest rates are among the options.

"We have the tools to do it," Warsh said. "Over the coming period, I'm going to ask our colleagues to have a good family fight about the extent and timing in which we would need to deploy those."

The remarks were the closest the new chairman has come to acknowledging that tighter policy could be on the table, economists said. "This is probably the closest Warsh has come to acknowledging that the Fed could raise rates in response to persistently high inflation, without explicitly signaling a hike," said Olu Sonola, head of US economics at Fitch Ratings.

Goldman Sachs economists, in a note to clients, said the testimony represented "hints about his view on responding to high inflation caused by supply shocks."

The comments landed on the same day the Labor Department reported that consumer prices fell in June for the first time in six years. Core inflation, which strips out volatile food and energy costs, was flat. Traders responded by dropping bets on a July rate hike.

"The CPI made this a very easy testimony for him," said Steven Englander, global head of G10 FX research at Standard Chartered Bank.

Warsh was nominated by President Donald Trump, who has repeatedly called for lower borrowing costs. Since taking office, Warsh has scrapped the Fed's forward-guidance system, arguing it ties officials' hands when economic conditions change. He had avoided any discussion of how the Fed might respond if inflation didn't ease, even as some of his fellow policymakers explicitly raised the potential for rate hikes.

Not everyone read the testimony as a shift. Jason Furman, a top economist in the Obama administration and now a professor at Harvard's Kennedy School, said Warsh steered clear of new guidance.

"Anyone who thinks they might be hearing hints of his future plans is mishearing," Furman said. "I would take no signal from anything right now because I think he hasn't decided what he wants to do yet."

The weak CPI print gave Warsh room to talk about the tools without committing to a move. The question now is whether inflation data in the coming months will force that conversation from theory into action.